ED Flags Indians Buying Dubai Properties Using Credit Cards

Mumbai: When it rains in Dubai, it pours in Mumbai. As the desert metropolis deals with a nervous property market, Indians who used credit cards to buy homes in Dubai are beginning to receive notices from the Enforcement Directorate (ED).

These property buyers had either swiped international credit cards (ICCs) on visits to the Emirates to pay the initial deposit or had clicked on payment links sent by UAE developers—probably, oblivious that they were trampling on Indian laws.

At least three persons were served notices by the central agency in February, questioning their source of funds for the deals, sources told ET.

Credit card transactions are like short-term loans and foreign exchange regulations prohibit individuals from borrowing to buy foreign properties. The Reserve Bank of India (RBI's) liberalised remittance scheme (LRS) used by resident individuals to buy stocks and apartments abroad requires the transfer of tax-paid funds through official banking channels.

Those stunned by the notices and seeking a condonation from ED, as well as those who are yet to come under the glare, are in a Catch-22 situation. They have to bear the hassle and cost of correcting the transaction, paying a fine, and in some cases, absorbing the loss of selling the property in a weak market with Dubai's reputation as a safe haven under a cloud.

“The recent round of ED notices have gone to individuals who may have unknowingly used credit cards to buy UAE properties. They should approach RBI to regularize the mode of payment. RBI may take a lenient view as the money is legitimate even if the mode of payment is wrong. Many a time resident Indians do cross-border purchases without knowing the law or consulting CAs,” said Rajesh Shah, partner at the CA firm Jayantilal Thakkar & Co, which specializes in forex and anti-money laundering regulations.

Prior to applying for compounding—the task of admitting to violation and settling the contravention by paying a penalty—the administrative process must be completed. This could, in some cases, mean reversing the original payment.

“The regularization process could involve remitting fresh funds through banks and instructing the builder to send back the amount that was paid with a credit card. In certain circumstances, RBI may ask buyers to sell the property and bring back funds,” said Shah.

This, however, involves arranging funds (without borrowing) and remitting dollars when the rupee is at a new low. If this is unattainable, the buyer may be compelled to sell the property to unwind the transaction. But, bankers feel the regulator may not insist on a reversal as funds were not moved through the hawala network.

“Using international credit cards (ICCs) for such purchases falls outside the permitted structure since acquisition of overseas property is treated as a 'capital account' transaction. Where such payments have already been made, individuals may need to examine regularization options, including the RBI's compounding mechanism,” said Moin Ladha, partner at Khaitan & Co.

ICCs, like local cards, are meant for current account transactions like buying books, downloading movies, and booking hotels.

According to Pankaj Bhuta, founder of the CA firm P. R. Bhuta & Co, even where the ED has initiated investigation against a resident individual, the latter may opt for compounding before the RBI at any time till the conclusion of adjudication proceedings. “Such compounding is typically subject to a no-objection from the ED, which in recent cases has been granted where it is satisfied that permitting compounding is aligned with the true spirit and intent of the Foreign Exchange Management Act (FEMA). In such cases, the RBI is empowered to cap the compounding amount at ₹2 lakhs,” said Bhuta.

Under LRS, a resident individual can transfer up to $250,000 a year to buy assets abroad as well as shop online from India. Some who used ICCs to buy properties perhaps did it to preserve their annual LRS limit.